Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

When Alcatel and Lucent Technologies merged in 2006 to form Alcatel-Lucent (NYSE:ALU), it seemed like the beginning of something special. The merged company provided a presence in 130 countries and combined wire, wireless, and broadband networking prowess. Yet less than six years later, the company stands on the precipice, having lost more than 90% of its value since the merger. Can Alcatel-Lucent pull out of its tailspin? Below, we'll take a look at how Alcatel-Lucent does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Alcatel-Lucent.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$2.2 billion

Fail

Consistency

Revenue growth > 0% in at least four of five past years

2 years

Fail

 

Free cash flow growth > 0% in at least four of past five years

1 year

Fail

Stock stability

Beta < 0.9

1.51

Fail

 

Worst loss in past five years no greater than 20%

(70.4%)

Fail

Valuation

Normalized P/E < 18

NM

NM

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

 

Streak of dividend increases >= 10 years

NM

NM

 

Payout ratio < 75%

NM

NM

       
 

Total score

 

0 out of 7

Source: S&P Capital IQ. NM = not meaningful due to negative earnings and lack of dividend. Total score = number of passes.

With no points, Alcatel-Lucent fails to meet any of the tests conservative investors might run against the stock. Shares have followed suit, dropping 60% in the past year alone.

Alcatel simply hasn't lived up to the promise it had several years ago. Rather than developing synergies, the two pieces of the company had trouble fully integrating, and economic troubles around the world left it vulnerable to competition that has since overwhelmed whatever competitive advantage it may once have had.

The problem now, though, is that the entire telecom equipment environment is terrible right now. Ericsson (NASDAQ:ERIC) and Nokia (NYSE:NOK) have taken big hits from a drop in European spending on telecom infrastructure, while Verizon also expects to spend less on infrastructure than it did last year. France Telecom's (NYSE:ORAN) plan to expand using Alcatel products is the equipment supplier's best chance at a comeback, but it's unclear whether it will be enough.

Alcatel is also trying to diversify, teaming up with Telefonica (NYSE:TEF) and Qualcomm to come up with a mobile operating system based on the Firefox browser. Given that Mozilla is nonprofit, it's unclear how big an opportunity this is for Alcatel, but it could push the mobile space forward.

For retirees and other conservative investors, though, Alcatel-Lucent is far too speculative to be considered a prudent investment. With no dividend, weak financial prospects, and an unclear future, you'd be better off looking for alternatives to Alcatel-Lucent for a retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills and teach you how to separate the right stocks from the risky ones.

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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of QUALCOMM and France Telecom. Motley Fool newsletter services have recommended buying shares of France Telecom. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.